Renewable PPAs for Mines - A Delicate Balance

RENEWABLE PPAS FOR MINES: A DELICATE BALANCE

An interview with Clément Faure, Head of Business Development, Mining and Hybrids, Total Eren

Corporate Power Purchase Agreements (PPAs) are increasingly popular for miners looking to power their operations with renewable energy because they enable a competitive and clean energy supply without capital investment. They structure a long-term relationship in a balanced way for both the miner and the Independent Power Producer (IPP), while ensuring renewable generation does not compromise the high reliability expectations inherent to mining operations.

Total Eren owns over 2,600 MW of renewable energy assets around the world and has another 2,000 MW of projects in the pipeline. In 2018, and together with Africa Energy Management Platform (AEMP), its strategic development partner for the mining sector in Africa, Total Eren started operating the 15 MW Essakane solar hybrid plant in Burkina Faso. Essakane Solar is the largest project of that kind in operation to date, enabling IAMGOLD to displace 6 million liters of diesel per year on site.

While the company’s reach to the mining sector has concentrated in Africa so far, Total Eren is now expanding to other mining markets such as Australia, Latin America and Central Asia, leveraging its existing asset base and teams in these countries as well as the privileged reach of the Total Group with international mining companies and international corporates in general. Energy and Mines spoke with Clément Faure, Head of Business Development, Mining and Hybrids at Total Eren, about the delicate exercise of drafting a renewable PPA for a mine.

Energy and Mines: How has the conversation around renewables integration in mining shifted in recent years?

Clément Faure: The shift has become notable from two angles. Economically, a few years ago, the relevance of unsubsidized renewable energy still had to be confirmed, but that’s no longer a question. Renewables have become an obvious source of low-cost energy for the mining sector in the same way they did for utilities across the globe. Energy storage follows the same cost reduction trend, enabling further optimized solutions not financially viable at the time of Essakane. As an illustration, I hope we will be able to announce one if not several new projects by the time those lines get printed.

Contractually now, the conversation revolves around the best strategy for a mine: should the mine invest its own capital or outsource its renewable energy supply as a service? When purchasing a grid connection or a thermal power plant, a mine secures its ability to operate with reliable baseload power supply. But renewables are all about energy: cleaner and cheaper, but available only as and when there is sun or wind. While yearly energy yields can be predicted accurately with statistics and weather models, the intermittency requires a balancing source of power. You can’t have it all, and the balance is hard to find.

For that reason, while investing into baseload capacity is a necessary capital outlay for a mine to guarantee the operability of its broader mining investment, outsourcing renewable energy supply to a trustworthy IPP partner with a demonstrated track record enables a mine to focus its capital, operational resources and management attention to its core business.

E&M: What should miners keep in mind when starting a tender process to find supply renewable energy?

CF: Having participated in nearly 30 tenders for mines over the past five years, we can observe that less than a handful of projects have materialized. What looks good on paper is not always deliverable in reality due to technical constraints, unrealistic schedules, or lack of financing. And this is not specific to projects for mines: in Africa, nearly 75% of public renewable energy projects with PPA signed in 2016 were yet to reach financial close in H1 2018. To bring a feasibility study or even a winning bid from paper to reality, a lot of value comes from the development and from the cooperation between the mine and the IPP partner. You cannot put all what it takes in a tender.

Size-wise, undersized projects do not achieve optimized economics but oversized projects compromise operation stability: expertise and studies will eventually ensure convergence. Price-wise, large price gaps in original bids tend to converge as discussions progress and shortcuts are eliminated. Finally, when size and price are getting right, the most important is still to deliver. Time is the enemy to realize savings over a limited life of mine and financing and permitting are two classic sources of delays or failure in delivery, while long-term performances and aligned interests are instrumental to ensure smooth operation over time.

The right technical and commercial risk allocation is always the fruit of extensive discussions and has to be tailored for and with each mine, depending on its risk appetite and site environment. If there are obvious benefits to well structured and well managed tenders to get clean and comparable data for discussion, there is also a lot of value in a trustable partnership, something you cannot always assess through a tender.

E&M: What are the benefits of behind-the-meter renewable contracts compared to the grid?

CF: Leveraging shared grid infrastructures generally delivers better energy prices but comes with strings attached around the availability and reliability of an infrastructure that you don’t control. When it’s behind the meter, you have more certainty but you may not get all the benefits you would get through the grid. The decision often depends on the location and availability of the grid, as mining operations settle where there are the mineral resources, with generally not as many power supply options as non-extractive industries.

Total Eren has major references in both behind-the-meter and wheeling projects : our Essakane project is the largest unsubsidized IPP project successfully implemented for an off-grid mine in the world and our 256MW Kiamal Project in Australia serves, each with a different agreement, no less than 5 counterparts with solar energy wheeled through the grid.

One thing remains for sure, whatever energy supply configuration the miner elects, power reliability is at the top of the agenda and competitive renewable energy will come second in our approach: here again it is ultimately a trade off with the value provided by intermittent but competitive renewable energy.

E&M: How can the PPA’s length be made optimal according to life of mine?

CF: Renewables are almost all CAPEX with very limited OPEX: the longer the PPA the better, as value is delivered over the long term. Yet, life of mine considerations can drive mining operators to seek PPAs shorter than the useful life of the assets. There is no issue as long as renewables create value, which all depends on the existing power set up, the location, etc. Thanks to our experience, we can assess fast and with a very good level of accuracy if we can create value for our mining customer or if we will end up wasting their time.

Again, it is all about the flexibility built within the contract through provisions for early termination around degraded mine life scenarios. The balance is hard to find, between ultra-flexibility, which always comes with a price tag on both costs and efficiency, similar to what exists in the conventional generation space, and the ability for these technologies to deliver the best of their value over the longest term possible.

We have very extensive discussions with our customers, flexibility on PPA terms, flexibility on the way the mine handles its power supply and how renewables would disrupt that, and flexibility on the optimal cash and resource allocation. These are discussions we look forward to having with many mining companies.

One thing to keep in mind is that contrary to a developer or a contractor, an IPP never takes a short-term view on earnings, and rather comes with a motivation to deliver promises over the PPA duration. We do not promise what we cannot deliver, simply because we recoup our investment over the long term without exit or sale strategy, aligning our interests with the mine as an off-taker. At the end of the day, the most important decision a mining operator has to make is who to partner with on their renewable energy journey.